Chapter 12

Segment Reporting, Profitability Analysis,

and Decentralization

True/False
1.
F
Medium

Contributionmarginandsegmentmarginmeanthesamething.

2.
F
Hard

Assumingthatasegmenthasbothvariableexpensesand
traceablefixedexpenses,anincreaseinsalesshouldincrease
profitsbyanamountequaltothesalestimesthesegment
marginratio.

3.
T
Medium

Thesalarypaidtoastoremanagerisatraceablefixedexpense
ofthestore.

4.
T
Easy

Segmentedstatementsforinternaluseshouldbepreparedinthe
contributionformat.

5.
T
Medium

Fixedcoststhataretraceabletoasegmentmaybecomecommon
ifthesegmentisdividedintosmallerunits.

6.
F
Medium

Inresponsibilityaccounting,eachsegmentinanorganization
shouldbechargedwiththecostsforwhichitisresponsible
andoverwhichithascontrolplusitsshareofcommon
organizationalcosts.

7.
T
Easy

Onlythosecoststhatwoulddisappearovertimeifasegment
wereeliminatedshouldbeconsideredtraceablecostsofthe
segment.

8.
T
Easy

Somemanagersbelievethatresidualincomeissuperiorto
returnoninvestmentasameansofmeasuringperformance,since
itencouragesthemanagertomakeinvestmentdecisionsthatare
moreconsistentwiththeinterestsofthecompanyasawhole.

9.
T
Easy

Thereturnoninvestmentcanordinarilybeimprovedbyeither
increasingsales,reducingexpenses,orreducingoperating
assets.

ManagerialAccounting,9/e

181

10.
F
Medium

Sincethesalesfigureisneutralinthereturnoninvestment
(ROI)formulaROI=MarginXTurnover,achangeintotalsales
willnotaffectROI.

11.
T
Medium

Allocationsofcorporateheadquartersexpensestodivisions
usedinreturnoninvestmentcalculationsshouldbelimitedto
thecostofthoseactualservicesprovidedbycentral
headquarterswhichthedivisionsotherwisewouldhaveto
provideforthemselves.

12.
T
Medium

Theuseofreturnoninvestmentasaperformancemeasuremay
leadmanagerstomakedecisionsthatarenotinthebest
interestsofthecompanyasawhole.

13.
T
Easy

Residualincomeisthenetoperatingincomethataninvestment
centerearnsabovetheminimumrequiredreturnonthe
investmentinoperatingassets.

14.
T
Medium

(Appendix)Whenadivisionisoperatingatfullcapacity,the
transferpricetootherdivisionsshouldincludeopportunity
costs.

15.
F
Hard

(Appendix)Whenanintermediatemarketpriceforatransferred
itemexists,itrepresentsalowerlimitonthechargethat
shouldbemadeontransfersbetweendivisions.

Multiple Choice
16.
B
Easy

Agoodexampleofacommoncostwhichnormallycouldnotbe
assignedtoproductsonasegmentedincomestatementexcepton
anarbitrarybasiswouldbe:
a.productadvertisingoutlays.
b.salaryofacorporationpresident.
c.directmaterials.
d.theproductmanager'ssalary.

17.
C
Medium

Allotherthingsbeingequal,ifadivision'straceablefixed
expensesincrease:
a.thedivision'scontributionmarginratiowilldecrease.
b.thedivision'ssegmentmarginratiowillremainthesame.
c.thedivision'ssegmentmarginwilldecrease.
d.theoverallcompanyprofitwillremainthesame.

18.
D
Easy

Turnoveriscomputedbydividingaverageoperatingassetsinto:
a.investedcapital.
b.totalassets.
c.netoperatingincome.
d.sales.

182ManagerialAccounting,9/e

19.
C
Medium

Whichofthefollowingstatementsprovide(s)anargumentin
favorofincludingonlyaplant'snetbookvalueratherthan
grossbookvalueaspartofoperatingassetsintheROI
computation?
I.Netbookvalueisconsistentwithhowplantand
equipmentitemsarereportedonabalancesheet.
II.Netbookvalueisconsistentwiththecomputationof
netoperatingincome,whichincludesdepreciationasan
operatingexpense.
III.NetbookvalueallowsROItodecreaseovertimeas
assetsgetolder.
a.OnlyI.
b.OnlyIII.
c.OnlyIandII.
d.OnlyIandIII.

20.
A
Medium

IncomputingthemargininaROIanalysis,whichofthe
followingisused?
a.Salesinthedenominator
b.Netoperatingincomeinthedenominator
c.Averageoperatingassetsinthedenominator
d.Residualincomeinthedenominator

21.
D
Easy

Whichofthefollowingisnotanoperatingasset?
a.Cash
b.Inventory
c.Plantequipment
d.Commonstock

22.
C
Medium
CPA
adapted

Assumingthatsalesandnetincomeremainthesame,acompany's
returnoninvestmentwill:
a.increaseifoperatingassetsincrease.
b.decreaseifoperatingassetsdecrease.
c.decreaseifturnoverdecreases.
d.decreaseifturnoverincreases.

23.
C
Medium
CPA
adapted

Allotherthingsequal,acompany'sreturnoninvestment(ROI)
wouldgenerallyincreasewhen:
a.averageoperatingassetsincrease.
b.salesdecrease.
c.operatingexpensesdecrease.
d.operatingexpensesincrease.

24.
B
Easy

Acompany'sreturnoninvestmentisthe:
a.margindividedbyturnover.
b.marginmultipliedbyturnover.
c.turnoverdividedbyaverageoperatingassets.
d.turnovermultipliedbyaverageoperatingassets.

ManagerialAccounting,9/e

183

25.
A
Easy

Allotherthingsequal,acompany'sreturnoninvestmentis
affectedbyachangein:
TurnoverMargin
a.YesYes
b.NoYes
c.NoNo
d.YesNo

26.
D
Medium

Netoperatingincomeisdefinedas:
a.salesminusvariableexpenses.
b.salesminusvariableexpensesandtraceablefixedexpenses.
c.contributionmarginminustraceableandcommonfixed
expenses.
d.netincomeplusinterestandtaxes.

27.
A
Easy

DelmarCorporationisconsideringtheuseofresidualincomeas
ameasureoftheperformanceofitsdivisions.Whatmajor
disadvantageofthismethodshouldthecompanyconsiderbefore
decidingtoinstituteit?
a.thismethoddoesnotmakeallowancefordifferenceinthe
sizeofcompareddivisions.
b.opportunitiesmaybeundertakenwhichwilldecreasethe
overallreturnoninvestment.
c.theminimumrequiredrateofreturnmayeliminatedesirable
opportunitiesfromconsideration.
d.residualincomedoesnotmeasurehoweffectivelythe
divisionmanagercontrolscosts.

28.
B
Medium

Supposeamanageristobemeasuredbyresidualincome.Which
ofthefollowingwillnotresultinanincreaseintheresidual
incomefigureforthismanager,assumingotherfactorsremain
constant?
a.Anincreaseinsales.
b.Anincreaseintheminimumrequiredrateofreturn.
c.Adecreaseinexpenses.
d.Adecreaseinoperatingassets.

29.
B
Medium

TheperformanceofthemanagerofDivisionAismeasuredby
residualincome.Whichofthefollowingwouldincreasethe
manager'sperformancemeasure?
a.Increaseinaverageoperatingassets.
b.Decreaseinaverageoperatingassets.
c.Increaseinminimumrequiredreturn.
d.Decreaseinnetoperatingincome.

184ManagerialAccounting,9/e

30.
C
Medium

(Appendix)Whenthesellingdivisioninaninternaltransfer
hasunsatisfieddemandfromoutsidecustomersfortheproduct
thatisbeingtransferred,thenthelowestacceptabletransfer
priceasfarasthesellingdivisionisconcernedis:
a.variablecostofproducingaunitofproduct.
b.thefullabsorptioncostofproducingaunitofproduct.
c.themarketpricechargedtooutsidecustomers,lesscosts
savedbytransferringinternally.
d.theamountthatthepurchasingdivisionwouldhavetopayan
outsidesellertoacquireasimilarproductforitsuse.

31.
C
Easy

Asegmentofabusinessresponsibleforbothrevenuesand
expenseswouldbecalled:
a.acostcenter.
b.aninvestmentcenter.
c.aprofitcenter.
d.residualincome.

32.
C
Easy

Whichofthefollowingarebenefitsofdecentralization?

33.
C
Medium

Considerthefollowingthreestatements:

I.Givingamanagerofadivisiongreaterdecisionmaking
controloverhis/herdivisionprovidesvitaltrainingfor
amanagerwhoisontheriseinthecompany.
II.Managersatcorporateheadquartershavegreatercontrolin
seeingthatthegoalsofthecompanyarerealized.
III.Addeddecisionmakingauthorityandresponsibilityoften
leadstoincreasedjobsatisfactionandoftenpersuadesa
managerto
putforthhis/herbestefforts.
a.OnlyIandII.
b.OnlyIIandIII.
c.OnlyIandIII.
d.OnlyI.

I.Aprofitcenterhascontroloverbothcostandrevenue.
II.Aninvestmentcenterhascontroloverinvestedfunds,
butnotovercostsandrevenue.
III.Acostcenterhasnocontroloversales
Whichstatement(s)is/arecorrect?
a.OnlyI
b.OnlyII
c.OnlyIandIII
d.OnlyIandII

ManagerialAccounting,9/e

185

34.
C
Hard

LyonsCompanyconsistsoftwodivisions,AandB.Lyons
Companyreportedacontributionmarginof$50,000forDivision
A,andhadacontributionmarginratioof30%inDivisionB,
whensalesinDivisionBwere$200,000.Netincomeforthe
companywas$25,000andtraceablefixedexpenseswere$40,000.
LyonsCompany'scommonfixedexpenseswere:
a.$85,000.
b.$70,000.
c.$45,000.
d.$40,000.

35.
B
Hard

MoreCompanyhastwodivisions,LandM.DuringJuly,the
contributionmargininDivisionLwas$60,000.Thecontribution
marginratioinDivisionMwas40%anditssaleswere$250,000.
DivisionM'ssegmentmarginwas$60,000.Thecommonfixed
expenseswere$50,000andthecompanynetincomewas$20,000.
ThesegmentmarginforDivisionLwas:
a.$0.
b.$10,000.
c.$50,000.
d.$60,000.

36.
B
Hard

DuringApril,DivisionDofCarneyCompanyhadasegmentmargin
ratioof15%,avariableexpenseratioof60%ofsales,and
traceablefixedexpensesof$15,000.DivisionD'ssaleswere
closestto:
a.$100,000.
b.$60,000.
c.$33,333.
d.$22,500.

37.
D
Hard

ReardonRetailCompanyconsistsoftwostores,AandB.Store
Ahadsalesof$80,000duringMarch,acontributionmargin
ratioof30%,andasegmentmarginof$11,000.Thecompanyasa
wholehadsalesof$200,000,acontributionmarginratioof
36%,andsegmentmarginsforthetwostorestotaling$31,000.
Ifnetincomeforthecompanywas$15,000forthemonth,the
traceablefixedexpensesinStoreBmusthavebeen:
a.$16,000.
b.$20,000.
c.$31,000.
d.$28,000.

186ManagerialAccounting,9/e

38.
B
Hard

LeisRetailCompanyhastwoStores,MandN.StoreNhadsales
of$180,000duringMarch,asegmentmarginof30%,and
traceablefixedexpensesof$26,000.Thecompanyasawholehad
acontributionmarginratioof25%and$120,000intotal
contributionmargin.Basedonthisinformation,totalvariable
expensesinStoreMforthemonthmusthavebeen:
a.$140,000.
b.$260,000.
c.$300,000.
d.$360,000.

39.
C
Hard

DennerCompanyhastwodivisions,AandB,thatreportedthe
followingresultsforOctober:
DivisionADivisionB
Sales....................$90,000$150,000
Variableexpensesasa
percentageofsales....70%60%
Segmentmargin...........$2,000$23,000
Ifcommonfixedexpenseswere$31,000,totalfixedexpenses
musthavebeen:
a.$31,000.
b.$62,000.
c.$93,000.
d.$52,000.

40.
C
Hard

JohnsonCompanyoperatestwoplants,PlantAandPlantB.
JohnsonCompanyreportedfortheyearjustendedacontribution
marginof$50,000forPlantA.PlantBhadsalesof$200,000
andacontributionmarginratioof30%.Netincomeforthe
companywas$20,000andtraceablefixedcostsforthetwo
plantstotaled$50,000.JohnsonCompany'scommonfixedcosts
forlastyearwere:
a.$50,000.
b.$70,000.
c.$40,000.
d.$90,000.

41.
A
Hard

HatchCompanyhastwodivisions,OandE.Duringtheyearjust
ended,DivisionOhadasegmentmarginof$9,000andvariable
costsequalto70%ofsales.TraceablefixedcostsforDivision
Ewere$19,000.HatchCompanyasawholehadacontribution
marginof40%,asegmentmarginof$25,000,andsalesof
$200,000.Giventhisdata,thesalesforDivisionEforlast
yearwere:
a.$50,000.
b.$150,000.
c.$87,500.
d.$116,667.

ManagerialAccounting,9/e

187

42.
B
Hard

DivisionBhadanROIlastyearof15%.Thedivision'sminimum
requiredrateofreturnis10%.Ifthedivision'saverage
operatingassetslastyearwere$450,000,thenthedivision's
residualincomeforlastyearwas:
a.$67,500.
b.$22,500.
c.$37,500.
d.$45,000.

43.
A
Hard

ReedCompany'ssaleslastyeartotaled$150,000anditsreturn
oninvestment(ROI)was12%.Ifthecompany'sturnoverwas3,
thenitsnetincomefortheyearmusthavebeen:
a.$6,000.
b.$2,000.
c.$18,000.
d.itisimpossibletodeterminefromthedatagiven.

44.
C
Hard

SalesandaverageoperatingassetsforCompanyPandCompanyQ
aregivenbelow:
SalesAverageOperatingAssets
CompanyP....$20,000$8,000
CompanyQ....$50,000$10,000
Whatisthemarginthateachcompanywillhavetoearninorder
togenerateareturnoninvestmentof20%?
a.12%and16%.
b.50%and100%.
c.8%and4%.
d.2.5%and5%.

45.
B
Hard

HoweCompanyincreaseditsROIfrom20%to25%.Netoperating
incomeandsalesremainedattheirpreviouslevelsof$40,000
and$1,000,000respectively.TheincreaseinROIwasattributed
toareductioninoperatingassetsbroughtaboutbythesaleof
obsoleteinventoryatcost(theproceedsfromthesalewere
usedtoreducebankloans).Byhowmuchwasinventoryreduced?
a.$8,000.
b.$40,000.
c.$10,000.
d.itisimpossibletodeterminefromthedatagiven.

46.
C
Medium

Lastyearacompanyhadstockholder'sequityof$160,000,net
operatingincomeof$16,000andsalesof$100,000.Theturnover
was0.5.Thereturnoninvestment(ROI)was:
a.10%.
b.9%.
c.8%.
d.7%.

188ManagerialAccounting,9/e

47.
A
Hard

Acompanyhadthefollowingresultslastyear:sales,$700,000;
returnoninvestment,28%;andmargin,8%.Theaverage
operatingassetslastyearwere:
a.$200,000.
b.$2,450,000.
c.$540,000.
d.$2,500,000.

48.
C
Medium

CableCompanyhadthefollowingresultsfortheyearjust
ended:
Netoperatingincome......$2,500
Turnover..................4
Returnoninvestment......20%
CableCompany'saverageoperatingassetsduringtheyearwere:
a.$50,000.
b.$200,000.
c.$12,500.
d.$10,000.

49.
D
Hard

LargoCompanyrecordedforthepastyearsalesof$750,000and
averageoperatingassetsof$375,000.Whatisthemarginthat
LargoCompanyneededtoearninordertoachieveanROIof15%?
a.2.00%
b.15.00%
c.9.99%
d.7.50%

50.
D
Easy

TheNorthernDivisionoftheSmithCompanyhadaverage
operatingassetstotaling$150,000lastyear.Iftheminimum
requiredrateofreturnis12%,andiflastyear'snet
operatingincomeatNorthernwas$20,000,thentheresidual
incomeforNorthernlastyearwas:
a.$20,000.
b.$l8,000.
c.$5,000.
d.$2,000.

ManagerialAccounting,9/e

189

51.
A
Medium

(Appendix)DivisionXmakesapartthatitsellstocustomers
outsideofthecompany.Dataconcerningthispartappearbelow:
Sellingpricetooutsidecustomers.....$75
Variablecostperunit.................$50
Totalfixedcosts......................$400,000
Capacityinunits......................25,000
DivisionYofthesamecompanywouldliketousethepart
manufacturedbyDivisionXinoneofitsproducts.DivisionY
currentlypurchasesasimilarpartmadebyanoutsidecompany
for$70perunitandwouldsubstitutethepartmadebyDivision
X.DivisionYrequires5,000unitsoftheparteachperiod.
DivisionXcanalreadysellalloftheunitsitcanproduceon
theoutsidemarket.Whatshouldbethelowestacceptable
transferpricefromtheperspectiveofDivisionX?
a.$75.
b.$66.
c.$16.
d.$50.

52.
D
Medium

(Appendix)DivisionXmakesapartthatitsellstocustomers
outsideofthecompany.Dataconcerningthispartappearbelow:
Sellingpricetooutsidecustomers$50
Variablecostperunit...........$30
Totalfixedcosts................$400,000
Capacityinunits................25,000
DivisionYofthesamecompanywouldliketousethepart
manufacturedbyDivisionXinoneofitsproducts.DivisionY
currentlypurchasesasimilarpartmadebyanoutsidecompany
for$49perunitandwouldsubstitutethepartmadebyDivision
X.DivisionYrequires5,000unitsoftheparteachperiod.
DivisionXhasampleexcesscapacitytohandleallofDivision
Y'sneedswithoutanyincreaseinfixedcostsandwithout
cuttingintooutsidesales.Accordingtothetransferpricing
formula,whatisthelowerlimitonthetransferprice?
a.$50.
b.$49.
c.$46.
d.$30.

190ManagerialAccounting,9/e

53.
D
Hard

(Appendix)DivisionAmakesapartthatitsellstocustomers
outsideofthecompany.Dataconcerningthispartappearbelow:
Sellingpricetooutsidecustomers....$40
Variablecostperunit................$30
Totalfixedcosts.....................$10,000
Capacityinunits.....................20,000
DivisionBofthesamecompanywouldliketousethepart
manufacturedbyDivisionAinoneofitsproducts.DivisionB
currentlypurchasesasimilarpartmadebyanoutsidecompany
for$38perunitandwouldsubstitutethepartmadebyDivision
A.DivisionBrequires5,000unitsoftheparteachperiod.
DivisionAhasamplecapacitytoproducetheunitsforDivision
Bwithoutanyincreaseinfixedcostsandwithoutcuttinginto
salestooutsidecustomers.IfDivisionAsellstoDivisionB
ratherthantooutsidecustomers,thevariablecostbeunit
wouldbe$1lower.Whatshouldbethelowestacceptable
transferpricefromtheperspectiveofDivisionA?
a.$40.
b.$38.
c.$30.
d.$29.

54.
C
Hard

(Appendix)DivisionXofCharterCorporationmakesandsellsa
singleproductwhichisusedbymanufacturersofforklift
trucks.Presentlyitsells12,000unitsperyeartooutside
customersat$24perunit.Theannualcapacityis20,000units
andthevariablecosttomakeeachunitis$16.DivisionYof
CharterCorporationwouldliketobuy10,000unitsayearfrom
DivisionXtouseinitsproducts.Therewouldbenocost
savingsfromtransferringtheunitswithinthecompanyrather
thansellingthemontheoutsidemarket.Whatshouldbethe
lowestacceptabletransferpricefromtheperspectiveof
DivisionX?
a.$24.00
b.$21.40
c.$17.60
d.$16.00

ManagerialAccounting,9/e

191

55.
B
Hard

(Appendix)DivisionPofTurboCorporationhasthecapacityfor
making75,000wheelsetsperyearandregularlysells60,000
eachyearontheoutsidemarket.Theregularsalespriceis
$100perwheelset,andthevariableproductioncostperunit
is$65.DivisionQofTurboCorporationcurrentlybuys30,000
wheelsets(ofthekindmadebyDivisionP)yearlyfroman
outsidesupplieratapriceof$90perwheelset.IfDivisionQ
weretobuythe30,000wheelsetsitneedsannuallyfrom
DivisionPat$87perwheelset,thechangeinannualnet
operatingincomeforthecompanyasawhole,comparedtowhat
itiscurrently,wouldbe:
a.$600,000.
b.$225,000.
c.$750,000.
d.$135,000.

56.
B
Hard

(Appendix)DivisionAofHarkinCompanyhasthecapacityfor
making3,000motorspermonthandregularlysells1,950motors
eachmonthtooutsidecustomersatacontributionmarginof$62
permotor.DivisionBofHarkinCompanywouldliketoobtain
1,400motorseachmonthfromDivisionA.Whatshouldbethe
lowestacceptabletransferpricefromtheperspectiveof
DivisionA?
a.$26.57
b.$15.50
c.$35.70
d.$62.00

Reference:121
IesoCompanyhastwostores:JandK.DuringNovember,IesoCompany
reportedanetincomeof$30,000andsalesof$450,000.Thecontribution
margininStoreJwas$100,000,or40%ofsales.ThesegmentmargininStore
Kwas$30,000,or15%ofsales.Traceablefixedexpensesare$60,000in
StoreJ,and$40,000inStoreK.
57.
B
Medium
ReferTo:
121

SalesinStoreJtotaled:
a.$400,000.
b.$250,000.
c.$150,000.
d.$100,000.

58.
D
Hard
ReferTo:
121

VariableexpensesinStoreKtotaled:
a.$70,000.
b.$110,000.
c.$200,000.
d.$130,000.

192ManagerialAccounting,9/e

59.
C
Hard
ReferTo:
121

IesoCompany'stotalfixedexpensesfortheyearwere:
a.$40,000.
b.$100,000
c.$140,000.
d.$170,000.

60.
A
Hard
ReferTo:
121

ThesegmentmarginratioinStoreJwas:
a.16%.
b.24%.
c.40%.
d.60%.

Reference:122
CanonCompanyhastwosalesareas:NorthandSouth.Duringlastyear,the
contributionmarginintheNorthAreawas$50,000,or20%ofsales.The
segmentmarginintheSouthwas$15,000,or8%ofsales.Traceablefixed
costsare$15,000intheNorthand$10,000intheSouth.Duringlastyear,
thecompanyreportedtotalnetincomeof$26,000.
61.
A
Hard
ReferTo:
122

Thetotalfixedcosts(traceableandcommon)forCanonCompany
fortheyearwere:
a.$49,000.
b.$25,000.
c.$24,000.
d.$50,000.

62.
C
Hard
ReferTo:
122

ThevariablecostsfortheSouthAreafortheyearwere:
a.$230,000.
b.$185,000.
c.$162,500.
d.$65,000.

Reference:123
ThefollowinginformationisavailableonCompanyA:
Sales.............................$900,000
Netoperatingincome..............36,000
Stockholders'equity..............100,000
Averageoperatingassets..........180,000
Minimumrequiredrateofreturn...15%
63.
A
Medium
ReferTo:
123

CompanyA'sresidualincomeis:
a.$9,000.
b.$21,000.
c.$45,000.
d.$24,000.

ManagerialAccounting,9/e

193

64.
C
Medium
ReferTo:
123

CompanyA'sreturnoninvestment(ROI)is:
a.4%.
b.15%.
c.20%.
d.36%.

Reference:124
ThefollowingdataareavailablefortheSouthDivisionofRedrideProducts,
Inc.andthesingleproductitmakes:
Unitsellingprice...........$20
Variablecostperunit.......$12
Annualfixedcosts...........$280,000
Averageoperatingassets.....$1,500,000
65.
D
Hard
ReferTo:
124

HowmanyunitsmustSouthselleachyeartohaveanROIof16%?
a.240,000.
b.1,300,000.
c.52,000.
d.65,000.

66.
B
Hard
ReferTo:
124

IfSouthwantsaresidualincomeof$50,000andtheminimum
requiredrateofreturnis10%,theannualturnoverwillhave
tobe:
a.0.32.
b.0.80.
c.1.25.
d.1.50.

Reference:125
TheAxleDivisionofLaBateCompanymakesandsellsonlyoneproduct.Annual
dataontheAxleDivision'ssingleproductfollow:
Unitsellingprice..................$50
Unitvariablecost..................$30
Totalfixedcosts...................$200,000
Averageoperatingassets............$750,000
Minimumrequiredrateofreturn.....12%
67.
D
Medium
ReferTo:
125

IfAxlesells15,000unitsperyear,theresidualincomeshould
be:
a.$30,000.
b.$100,000.
c.$50,000.
d.$10,000.

194ManagerialAccounting,9/e

68.
C
Medium
ReferTo:
125

IfAxlesells16,000unitsperyear,thereturnoninvestment
shouldbe:
a.12%.
b.15%.
c.16%.
d.18%.

69.
C
Hard
ReferTo:
125

SupposethemanagerofAxledesiresareturnoninvestmentof
22%.Inordertoachievethisgoal,Axlemustsellhowmany
unitsperyear?
a.14,500.
b.16,750.
c.18,250.
d.19,500.

70.
B
Hard
ReferTo:
125

SupposethemanagerofAxledesiresanannualresidualincome
of$45,000.Inordertoachievethis,Axleshouldsellhowmany
unitsperyear?
a.14,500.
b.16,750.
c.18,250.
d.19,500.

Reference:126
EstesCompanyhasassembledthefollowingdataforitsdivisionsforthe
pastyear:
DivisionADivisionB
Averageoperatingassets...$500,000?
Sales......................?$520,000
Netoperatingincome.......$100,000$20,300
Turnover...................1.254
Margin.....................?3.9%
Minimumrequiredrate
ofreturn................14%?
Residualincome............?$6,000
71.
B
Hard
ReferTo:
126

DivisionA'ssalesare:
a.$400,000.
b.$625,000.
c.$125,000.
d.$200,000.

72.
B
Medium
ReferTo:
126

DivisionA'sresidualincomeis:
a.$20,000.
b.$30,000.
c.$35,000.
d.$45,000.

ManagerialAccounting,9/e

195

73.
D
Medium
ReferTo:
126

DivisionB'saverageoperatingassetsis:
a.$81,200.
b.$2,080,000.
c.$1,333,333.
d.$130,000.

Reference:127
TheHolmesDivisionrecordedoperatingdataasfollowsforthepastyear:
Sales..........................$200,000
Netoperatingincome...........25,000
Averageoperatingassets.......100,000
Stockholders'equity...........80,000
Residualincome................13,000
74.
C
Medium
ReferTo:
127

Forthepastyear,thereturnoninvestmentwas:
a.15.75%.
b.20.50%.
c.25.00%
d.31.25%.

75.
A
Medium
ReferTo:
127

Forthepastyear,themarginwas:
a.12.50%.
b.13.00%.
c.14.75%.
d.15.00%.

76.
D
Medium
ReferTo:
127

Forthepastyear,theturnoverwas:
a.25.
b.10.
c.4.
d.2.

77.
B
Hard
ReferTo:
127

Forthepastyear,theminimumrequiredrateofreturnwas:
a.11%.
b.12%.
c.13%.
d.14%.

196ManagerialAccounting,9/e

Reference:128
TheBailyDivisionrecordedoperatingdataasfollowsforthepasttwo
years:
Year1Year2
Sales.......................?$1,200,000
Stockholders'equity........$540,000720,000
Averageoperatingassets....$600,000?
Margin......................15%?
Returnoninvestment........22.5%18%
BailyDivision'sturnoverwasexactlythesameinbothYear1andYear2.
78.
B
Hard
ReferTo:
128

SalesinYear1amountedto:
a.$400,000.
b.$900,000.
c.$750,000.
d.$1,200,000.

79.
B
Hard
ReferTo:
128

ThenetoperatingincomeinYear1was:
a.$90,000.
b.$135,000.
c.$140,000.
d.$150,000.

80.
D
Hard
ReferTo:
128

ThemargininYear2was:
a.18.75%.
b.27.00%.
c.22.50%.
d.12.00%.

81.
C
Hard
ReferTo:
128

TheaverageoperatingassetsinYear2were:
a.$720,000.
b.$750,000.
c.$800,000.
d.$900,000.

Reference:129
ThefollowingselecteddatapertaintothebeltdivisionofAllenCorp.for
lastyear:
Sales............................$500,000
Averageoperatingassets.........$200,000
Netoperatingincome.............$80,000
Turnover.........................2.5
Minimumrequiredreturn..........20%

ManagerialAccounting,9/e

197

82.
A
Medium
CPA
adapted
ReferTo:
129

Howmuchisthereturnoninvestment?
a.40%
b.16%
c.20%
d.15%

83.
C
Medium
CPA
adapted
ReferTo:
129

Howmuchistheresidualincome?
a.$100,000
b.$80,000
c.$40,000
d.$420,000

Reference:1210
ThefollowingselecteddatapertaintoBeckCo.'sBeamDivisionforlast
year:
Sales.............................$400,000
Variableexpenses.................$100,000
Traceablefixedexpenses..........$250,000
Averageoperatingassets..........$200,000
Minimumrequiredrateofreturn...20%
84.
C
Medium
CPA
adapted
ReferTo:
1210

Howmuchistheresidualincome?
a.$40,000
b.$50,000
c.$10,000
d.$80,000

85.
A
Medium
CPA
adapted
ReferTo:
1210

Howmuchisthereturnontheinvestment?
a.25%
c.20%
b.12.5%
d.40%

198ManagerialAccounting,9/e

Reference:1211
TheNorthernDivisionoftheGordonCompanyreportedthefollowingdatafor
lastyear:
Sales.................................$900,000
Stockholders'Equity..................$320,000
OperatingExpenses....................$700,000
AverageOperatingAssets..............$500,000
InterestExpense......................$50,000
TaxExpense...........................$60,000
MinimumRequiredRateofReturn.......15%
86.
C
Medium
ReferTo:
1211

ThereturnoninvestmentlastyearfortheNorthernDivision
was:
a.28.125%.
b.62.5%.
c.40%.
d.18%.

87.
B
Medium
ReferTo:
1211

TheresidualincomefortheNorthernDivisionlastyearwas:
a.$90,000.
b.$125,000.
c.$48,000.
d.$135,000.

Reference:1212
HarstinCorporationhasprovidedthefollowingdata:
Sales..........................$625,000
Grossmargin...................70,000
Netoperatingincome...........50,000
Stockholders'equity...........90,000
Averageoperatingassets.......250,000
Residualincome................20,000
88.
D
Medium
ReferTo:
1212

Themarginforthepastyearwas:
a.19.2%.
b.14.4%.
c.11.2%.
d.8.0%.

89.
B
Medium
ReferTo:
1212

Thereturnoninvestmentforthepastyearwas:
a.28%.
b.20%.
c.36%.
d.8%.

ManagerialAccounting,9/e

199

90.
A
Medium
ReferTo:
1212

Theturnoverforthepastyearwas:
a.2.5.
b.6.94.
c.2.98.
d.1.4.

91.
C
Medium
ReferTo:
1212

Theminimumrequiredrateofreturnforthepastyearwas:
a.36%.
b.8%.
c.12%.
d.40%.

Reference:1213
TheMillardDivision'soperatingdataforthepasttwoyearsareprovided
below:

Year1Year2

Returnoninvestment......12%36%
Stockholders'equity......$800,000$500,000
Netoperatingincome......?360,000
Turnover..................?3
Margin....................??
Sales.....................3,200,000?
MillardDivision'smargininYear2was150%ofthemargininYear1.
92.
B
Hard
ReferTo:
1213

ThenetoperatingincomeforYear1was:
a.$240,000.
b.$256,000.
c.$384,000.
d.$768,000.

93.
B
Hard
ReferTo:
1213

TheturnoverforYear1was:
a.1.2.
b.1.5.
c.3.0.
d.4.0.

94.
C
Hard
ReferTo:
1213

ThesalesforYear2were:
a.$1.200,000.
b.$3,200,000.
c.$3,000,000.
d.$3,333,333.

95.
A
Hard
ReferTo:
1213

TheaverageoperatingassetsforYear2were:
a.$1,000,000.
b.$1,080,000.
c.$1,200,000.
d.$1,388,889.

200ManagerialAccounting,9/e

Reference:1214
(Appendix)DivisionAmakesapartwiththefollowingcharacteristics:
Productioncapacityinunits........15,000units
Sellingpricetooutsidecustomers..$25
Variablecostperunit..............$18
Totalfixedcosts...................$60,000
DivisionB,anotherdivisionofthesamecompany,wouldliketopurchase
5,000unitsoftheparteachperiodfromDivisionA.DivisionBisnow
purchasingthesepartsfromanoutsidesupplieratapriceof$24each.
96.
A
Medium
ReferTo:
1214

SupposethatDivisionAhasampleidlecapacitytohandleallof
DivisionB'sneedswithoutanyincreaseinfixedcostsand
withoutcuttingintosalestooutsidecustomers.IfDivisionB
continuestopurchasepartsfromanoutsidesupplierratherthen
fromDivisionA,thecompanyasawholewillbe:
a.worseoffby$30,000eachperiod.
b.worseoffby$10,000eachperiod.
c.betteroffby$15,000eachperiod.
d.worseoffby$35,000eachperiod.

97.
C
Medium
ReferTo:
1214

SupposethatDivisionAisoperatingatcapacityandcansellall
ofitsoutputtooutsidecustomersatitsusualsellingprice.If
DivisionAsellsthepartstoDivisionBat$24perunit
(DivisionBsoutsideprice),thecompanyasawholewillbe:
a.betteroffby$5,000eachperiod.
b.worseoffby$15,000eachperiod,
c.worseoffby$5,000eachperiod.
d.therewillbenochangeinthestatusofthecompanyasa
whole,

Reference:1215
(Appendix)DivisionAproducesapartwiththefollowingcharacteristics:
Capacityinunits.............50,000
Sellingpriceperunit........$30
Variablecostsperunit.......$18
Fixedcostsperunit..........$3
DivisionB,anotherdivisioninthecompany,wouldliketobuythispart
fromDivisionA.DivisionBispresentlypurchasingthepartfroman
outsidesourceat$28perunit.IfDivisionAsellstoDivisionB,$1in
variablecostscanbeavoided.

ManagerialAccounting,9/e

201

98.
B
Medium
ReferTo:
1215

SupposeDivisionAiscurrentlyoperatingatcapacityandcan
sellalloftheunitsisproducesontheoutsidemarketforits
usualsellingprice.FromthepointofviewofDivisionA,any
salestoDivisionBshouldbepricednolowerthan:
a.$27.
b.$29.
c.$20.
d.$28.

99.
D
Medium
ReferTo:
1215

SupposethatDivisionAhasampleidlecapacitytohandleallof
DivisionB'sneedswithoutanyincreaseinfixedcostsand
withoutcuttingintoitssalestooutsidecustomers.Fromthe
pointofviewofDivisionA,anysalestoDivisionBshouldbe
pricednolowerthan:
a.$29.
b.$30.
c.$18.
d.$17.

Reference:1216
(Appendix)TheVegaDivisionofAceCompanymakeswheelswhichcaneitherbe
soldtooutsidecustomersortransferredtotheWalshDivisionofAce
Company.LastmonththeWalshDivisionboughtall4,000ofitswheelsfrom
theVegaDivisionfor$42each.Thefollowingdataareavailablefromlast
month'soperationsfortheVegaCompany:
Capacity......................................12,000wheels
Sellingpriceperwheeltooutsidecustomers..$45
Variablecostsperwheelwhensoldto
outsidecustomers.......................$30
IftheVegaDivisionsellswheelstotheWalshDivision,Vegacanavoid$2
perwheelinsalescommissions.Anoutsidesupplierhasofferedtosupply
wheelstotheWalshDivisionfor$41each.
100.
A
Medium
ReferTo:
1216

SupposethattheVegaDivisionhasampleidlecapacitysothat
transferstotheWalshDivisionwouldnotcutintoitssalesto
outsidecustomers.Whatshouldbethelowestacceptabletransfer
pricefromtheperspectiveoftheVegaDivision?
a.$28
b.$30
c.$42
d.$45

101.
B
Medium
ReferTo:
1216

WhatisthemaximumpriceperwheelthatWalshshouldbewilling
topayVega?
a.$28
b.$41
c.$42
d.$45

202ManagerialAccounting,9/e

102.
B
Hard
ReferTo:
1216

SupposethatVegacansell9,000wheelseachmonthtooutside
consumers,sotransferstotheWalshDivisioncutintooutside
sales.Whatshouldbethelowestacceptabletransferpricefrom
theperspectiveoftheVegaDivision?
a.$28.00
b.$31.75
c.$41.00
d.$42.00

Reference:1217
(Appendix)ThePostDivisionoftheM.T.WoodheadCompanyproducesbasic
postswhichcanbesoldtooutsidecustomersorsoldtotheLampDivisionof
theM.T.WoodheadCompany.LastYeartheLampDivisionboughtallofits
25,000postsfromPostat$1.50each.Thefollowingdataareavailablefor
lastyear'sactivitiesofthePostDivision:
Capacityinunits..............300,000posts
Sellingpriceperpost
tooutsidecustomers........$1.75
Variablecostsperpost........$0.90
Fixedcosts,total.............$150,000
Thetotalfixedcostswouldbethesameforallthealternativesconsidered
below.
103.
A
Medium
ReferTo:
1217

Supposethereisamplecapacitysothattransfersofthepoststo
theLampDivisiondonotcutintosalestooutsidecustomers.
Whatisthelowesttransferpricethatwouldnotreducethe
profitsofthePostDivision?
a.$0.90.
b.$1.35.
c.$1.41.
d.$1.75.

104.
C
Hard
ReferTo:
1217

SupposethetransfersofpoststotheLampDivisioncutinto
salestooutsidecustomersby15,000units.Whatisthelowest
transferpricethatwouldnotreducetheprofitsofthePost
Division?
a.$0.90.
b.$1.35.
c.$1.41.
d.$1.75.

ManagerialAccounting,9/e

203

105.
C
Hard
ReferTo:
1217

SupposethetransfersofpoststotheLampDivisioncutinto
salestooutsidecustomersby15,000units.Furthersupposethat
anoutsidesupplieriswillingtoprovidetheLampDivisionwith
basicpostsat$1.45each.IftheLampDivisionhadchosentobuy
allofitspostsfromtheoutsidesupplierinsteadofthePost
Division,thechangeinnetoperatingincomeforthecompanyasa
wholewouldhavebeen:
a.$1,250decrease.
b.$10,250increase.
c.$1,000decrease.
d.$13,750decrease.

Essay
106.
Medium

TheWinterProductsDivisionofAmericanSportsCorporation
producesandmarketstwoproductsforuseinthesnow:Sleds
andSaucers.Thefollowingdataweregatheredonactivities
lastmonth:
SledsSaucers
Salesinunits...................2,0009,000
Sellingpriceperunit...........$50$20
Variableproductioncostsperunit$20$5
Traceablefixedproductioncosts$12,000$33,000
Variablesellingexpensesperunit$2$1
Traceablefixedsellingexpenses$2,000$3,000
Allocateddivisionadminis
trativeexpenses...............$40,000$72,000
Required:
Prepareasegmentedincomestatementinthecontributionformat
forlastmonth,showingboth"Amount"and"Percent"columnsfor
thedivisionasawholeandforeachproduct.
Answer:

Segments

o
TotalCompanySledsSaucers

o
Sales........$280,000100%$100,000100%$180,000100%
Variable
expenses...98,0003544,0004454,00030
Contribution
margin...182,0006556,00056126,00070
Traceablefixed
expenses...50,0001814,0001436,00020
Segment
margin.....132,00047$42,00042%$90,00050%
Commonfixed
expenses...112,00040
NetIncome...$20,0007%

204ManagerialAccounting,9/e

107.
Medium

TheITCorporationproducesandmarketstwotypesofelectronic
calculators:Model11andModel12.Thefollowingdatawere
gatheredonactivitieslastmonth:
Model11Model12
Salesinunits........................5,0003,000
Sellingpriceperunit................$50$100
Variableproductioncostsperunit....$10$26
Traceablefixedproductioncosts......$100,000$150,000
Variablesellingexpensesperunit....$5$6
Traceablefixedsellingexpenses......$5,000$7,500
Allocateddivisionadministrative
expenses.............................$50,000$60,000
Required:
Prepareasegmentedincomestatementinthecontributionformat
forlastmonth,showingboth"Amount"and"Percent"columnsfor
thedivisionasawholeandforeachproduct.
Answer:

Segments

TotalCompanyModel11Model12

Sales$550,000100%$250,000100%$300,000100.0%
Variable
expenses....171,0003175,0003096,00032.0
Contribution
margin......$379,00069%$175,00070%$204,00068.0%
Traceablefixed
expenses....262,50048105,00042157,50052.5
Segment
margin......$116,50021%$70,00028%$46,50015.5%
Commonfixed
expenses....110,00020
NetIncome....$6,5001%

108.
Medium

FinancialdataforBeakerCompanyforlastyearappearbelow:
BeakerCompany
StatementsofFinancialPosition
BeginningEnding
BalanceBalance
Assets:
Cash................................$50,000$70,000
Accountsreceivable.................20,00025,000
Inventory...........................30,00035,000
Plantandequipment(net)...........120,000110,000
InvestmentinCedarCompany.........80,000100,000
Land(undeveloped)..................170,000170,000
Totalassets.......................$470,000$510,000

ManagerialAccounting,9/e

205

Liabilitiesandowners'equity:
Accountspayable....................$70,000$90,000
Longtermdebt......................250,000250,000
Owners'equity......................150,000170,000
Totalliabilities
andowners'equity..............$470,000$510,000
BeakerCompany
IncomeStatement
Sales.................................$414,000
Lessoperatingexpenses............351,900
Netoperatingincome...............62,100
Lessinterestandtaxes:
Interestexpense.................$30,000
Taxexpense......................10,00040,000
NetIncome.........................$22,100
Thecompanypaiddividendsof$2,100lastyear.The"Investment
inCedarCompany"onthestatementoffinancialposition
representsaninvestmentinthestockofanothercompany.
Required:
a.Computethecompany'smargin,turnover,andreturnon
investmentforlastyear.
b.TheBoardofDirectorsofBeakerCompanyhavesetaminimum
requiredreturnof20%.Whatwasthecompany'sresidual
incomelastyear?
Answer:
a.Operatingassetsdonotincludeinvestmentsinother
companiesorinundevelopedland.
BeginningEnding
BalanceBalance
Cash....................$50,000$70,000
Accountsreceivable.....20,00025,000
Inventory...............30,00035,000
Plantandequipment(net)120,000110,000
Totaloperatingassets$220,000$240,000
Averageoperatingassets=($220,000+$240,000)2
=$230,000
Margin=NetoperatingincomeSales
=$62,100$414,000
=15%
Turnover=SalesAverageoperatingassets
=$414,000$230,000
=1.8
ROI=MarginXTurnover
206ManagerialAccounting,9/e

=15%X1.8
=27%
b.Netoperatingincome...........$62,100
Minimumrequiredreturn
(20%X$230,000).............46,000
Residualincome................$16,100
109.
Hard

FinancialdataforBinghamCompanyforlastyearappearbelow:
BinghamCompany
StatementsofFinancialPosition
BeginningEnding
BalanceBalance
Assets:
Cash..............................$135,000$266,000
Accountsreceivable...............225,000475,000
Inventory.........................314,000394,000
Plantandequipment(net).........940,000860,000
InvestmentinCarrCompany........104,000101,000
Land(undeveloped)................198,00065,000
Totalassets.....................$1,916,000$2,161,000
Liabilitiesandowners'equity:
Accountspayable..................$88,000$119,000
Longtermdebt....................585,000665,000
Owners'equity....................1,243,0001,377,000
Totalliabilities
andowners'equity............$1,916,000$2,161,000
BinghamCompany
IncomeStatement
Sales............................$4,644,000
Lessoperatingexpenses..........4,291,000
Netoperatingincome.............353,000
Lessinterestandtaxes:
Interestexpense...............$90,000
Taxexpense....................129,000219,000
NetIncome.......................$134,000
The"InvestmentinCarrCompany"onthestatementoffinancial
positionrepresentsaninvestmentinthestockofanother
company.
Required:
a.Computethecompany'smargin,turnover,andreturnon
investmentforlastyear.
b.TheBoardofDirectorsofBeakerCompanyhavesetaminimum
requiredreturnof15%.Whatwasthecompany'sresidual
incomelastyear?

ManagerialAccounting,9/e

207

Answer:
a.Operatingassetsdonotincludeinvestmentsinother
companiesorinundevelopedland.
BeginningEnding
BalanceBalance
Cash.....................$135,000$266,000
Accountsreceivable......225,000475,000
Inventory................314,000394,000
Plantandequipment(net)940,000860,000
Totaloperatingassets$1,614,000$1,995,000
Averageoperatingassets=($1,614,000+$1,995,000)2
=$1,804,500
Margin=NetoperatingincomeSales
=$353,000$4,644,000
=7.60%
Turnover=SalesAverageoperatingassets
=$4,644,000$1,804,500
=2.57
ROI=Netoperatingincome
Averageoperatingassets
=$353,000$1,804,500
=19.56%
b.Netoperatingincome....$353,000
Minimumrequiredreturn
(15%X$1,804,500)....270,675
Residualincome.........$82,325
110.
Medium

Thefollowingdatahavebeenextractedfromtheyearend
reportsoftwocompaniesCompanyXandCompanyY:
CompanyXCompanyY
Sales.........................$800,000?
Netoperatingincome..........$56,000?
Averageoperatingassets......?$125,000
Margin........................?4%
Turnover......................?6
Returnoninvestment..........14%?

208ManagerialAccounting,9/e

Required:
Fillinthemissingdataontheabovetable.

Answer:
CompanyXCompanyY
Sales............................$800,000$750,000
NetOperatingIncome.............$56,000$30,000
AverageOperatingAssets.........$400,000$125,000
Margin...........................7%4%
Turnover.........................26
ROI..............................14%24%

111.
Medium

Thefollowingdatahavebeenextractedfromtheyearend
reportsoftwocompaniesCompanyXandCompanyY:
CompanyXCompanyY
Sales.........................$2,700,000?
Netoperatingincome..........$256,000?
Averageoperatingassets......?$1,725,000
Margin........................?8%
Turnover......................?2
Returnoninvestment..........16%?
Required:
Fillinthemissingdataontheabovetable.

Answer:
CompanyXCompanyY
Sales............................$2,700,000$3,450,000
NetOperatingIncome.............$256,000$276,000
AverageOperatingAssets.........$1,600,000$1,725,000
Margin...........................9.5%8.0%
Turnover.........................1.72.0
ROI..............................16%16%

ManagerialAccounting,9/e

209

112.
Hard

(Appendix)LarinoreCorporationhasaCastingsDivisionwhich
doescastingworkofvarioustypes.Thecompany'sMachine
ProductsDivisionhasaskedtheCastingsDivisiontoprovideit
with20,000specialcastingseachyearonacontinuingbasis.
Thespecialcastingwouldrequire$10perunitinvariable
productioncosts.TheMachineProductsDivisionhasabidfrom
anoutsidesupplierforthecastingsof$29perunit.
Inordertohavetimeandspacetoproducethenewcasting,the
CastingsDivisionwouldhavetocutbackproductionofanother
castingtheRB4whichitpresentlyisproducing.TheRB4
sellsfor$30perunit,andrequires$12perunitinvariable
productioncosts.BoxingandshippingcostsoftheRB4are$4
perunit.Boxingandshippingcostsforthenewspecialcasting
wouldbeonly$1perunit.Thecompanyisnowproducingand
selling100,000unitsoftheRB4eachyear.Productionand
salesofthiscastingwoulddropby20%ifthenewcastingis
produced.
Required:
a.Whatistherangeoftransferpriceswithinwhichboththe
Divisions'profitswouldincreaseasaresultofagreeingto
thetransferof20,000castingsperyearfromtheCastings
DivisiontotheMachineProductsDivision?
b.IsitinthebestinterestsofLarinoreCorporationforthis
transfertotakeplace?Explain.
Answer:
a.FromtheperspectiveoftheCastingsDivision,profitswould
increaseasaresultofthetransferprovidingthat:
Transferprice>Variablecost+Opportunitycost
Theopportunitycostisthecontributionmarginonthelost
sales,dividedbythenumberofunitstransferred:
Opportunitycost=[($30$12$4)x20,000]/20,000=$16
Therefore,
Transferprice>($10+$1)+$16=$27
Fromtheviewpointofthepurchasingdivision,thetransfer
pricemustbelessthanthecostofbuyingtheunitsfrom
theoutsidesupplier.
Transferprice<$29
Combiningthetworequirements,wegetthefollowingrange
oftransferprices:

210ManagerialAccounting,9/e

$27<Transferprice<$29
b.Yes,thetransfershouldtakeplace.Fromtheviewpointof
theentirecompany,thecostoftransferringtheunits
withinthecompanyis$27,butthecostofpurchasingthem
fromtheoutsidesupplieris$29.Therefore,thecompany's
profitsincreaseby$2foreachofthecastingsthatisused
withinthecompanyratherthanbeingsoldontheoutside
market.
113.
Hard

(Appendix)GenevaCorporationhasaCastingsDivisionthatdoes
castingworkofvarioustypes.Thecompany'sMachineProducts
DivisionhasaskedtheCastingsDivisiontoprovideitwith
10,000specialcastingseachyearonacontinuingbasis.The
specialcastingwouldrequire$20perunitinvariable
productioncosts.TheMachineProductsDivisionhasabidfrom
anoutsidesupplierforthecastingsof$30perunit.
Inordertohavetimeandspacetoproducethenewcasting,the
CastingsDivisionwouldhavetocutbackproductionofanother
castingtheNW2whichitpresentlyisproducing.TheNW2
sellsfor$40perunit,andrequires$25perunitinvariable
productioncosts.BoxingandshippingcostsoftheNW2are$4
perunit.Boxingandshippingcostsforthenewspecialcasting
wouldbeonly$2perunit.Thecompanyisnowproducingand
selling100,000unitsoftheNW2eachyear.Productionand
salesofthiscastingwoulddropby10%ifthenewcastingwere
produced.
Required:
a.Whatistherangeoftransferprices,ifany,withinwhich
boththeDivisions'profitswouldincreaseasaresultof
agreeingtothetransferof10,000castingsperyearfrom
theCastingsDivisiontotheMachineProductsDivision?
b.IsitinthebestinterestsofGenevaCorporationforthis
transfertotakeplace?Explain.

ManagerialAccounting,9/e

211

Answer:
a.FromtheperspectiveoftheCastingsDivision,profitswould
increaseasaresultofthetransferprovidingthat:
Transferprice>Variablecost+Opportunitycost
Theopportunitycostisthecontributionmarginonthelost
ales,dividedbythenumberofunitstransferred:
Opportunitycost=[($40$25$4)x10,000]/10,000=$11
Therefore,
Transferprice>($20+$2)+$11=$33
Fromtheviewpointofthepurchasingdivision,thetransfer
pricemustbelessthanthecostofbuyingtheunitsfrom
theoutsidesupplier.
Transferprice<$30
Combiningthetworequirements,wefindthatnofeasible
rangeoftransferpricesexistsundercurrentconditions.
b.No,thetransfershouldnottakeplace.Fromtheviewpoint
oftheentirecompany,thecostoftransferringtheunits
withinthecompanyis$33,butthecostofpurchasingthem
fromtheoutsidesupplieris$30.Therefore,thecompany's
profitsdecreaseby$3foreachofthecastingsthatis
producedwithinthecompanyratherthanbeingpurchasedin
theoutsidemarket.

212ManagerialAccounting,9/e